Political change in India could prove shot in the arm for mineral industry

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Published: Thursday, 19 June 2014

The election of the right of centre Bharatiya Janata Party, led by Narendra Modi, by a clear majority, promises a move away from populist, consensus politics in India and could lead to sweeping economic reform, which in turn is likely to boost domestic raw material output and demand.

By Wayne Yamada

In mid-May, India elected a new leader and new government, a change that could pave the way for a shakeup in the country’s industrial minerals market.

 

India's newly elected Prime Minister Narendra Modi has promised to reform the country's economic policies with measures that could see domestic mineral resources exploited to their full potential (source: Narendra Modi).
For the first time in three decades, India has a government with a clear majority after the broadly right wing Bharatiya Janata Party (BJP), led by Narendra Modi, won the election by a clear margin, taking 340 of the 543 seats in the Indian parliament.

Even though India is rich in industrial minerals, it has been unable to exploit them fully, partly due to pressure on previous governments to pursue populist policies, rather than tough, economic ones.

Since 1984 and until the election of Modi, coalitions and alliances have dominated Indian politics, resulting in drawn out consensus building and delays to much economic needed reforms. In the last few years, this situation has led to ballooning government debts, a weakening rupee and falling investor confidence.

Examples of India’s inefficient industrial minerals sector includes the domestic production and imports of graphite.

Despite hosting huge graphite deposits of around 11m tonnes – second only to China’s reserves – India’s graphite import volumes have doubled since 2009, to 23,291 tonnes last year. Meanwhile, domestic graphite production has rested at around 25,000 tpa from 2008-2012, according to figures from IM Data.

India is also has large feldspar reserves, but a recent rise in Indian exports means domestic consumers have resorted to importing of the glass and ceramics mineral. While feldspar production increased by 10% between 2009 and 2012, to 430,000 tonnes, imports have jumped 700% to over 51,000 tonnes in the same period.

Modinomics

Prime Minister Modi has a track record in promoting economic growth. Before becoming Prime Minister of India, he was chief minister for the state of Gujarat for over a decade. During that period, Gujarat’s gross domestic product (GDP) outperformed other states due largely to his policies, which have been dubbed “Modinomics” by commentators.

These included reducing the state’s deficit of Indian rupee (INR) 67.32bn ($1.15bn*) in fiscal year 2001-02 to a present surplus of INR 46.02bn ($0.79bn), and attracting INR 39 trillion ($667bn) in foreign investments via the Vibrant Gujarat Investors Summit initiative.

He has also focused on developing the state’s industrial and agriculture sectors. Gujarat now has over 10% of India’s factories, despite having less than 5% of the population. The state has also doubled its milk production in the last 10 years to 10.32m tonnes (9.66m litres) at present.

Modi is expected to try and repeat these successes on a national level, with policies that could positively impact the country’s industrial minerals sector.

Boost to manufacturing

One of the BJP’s priorities is to improve the productivity of India’s manufacturing sector, with the aim of boosting exports and international revenue.

“We should no longer remain a market for the global industry. Rather, we should become a global manufacturing hub,” the BJP said in its election manifesto.

“Increased economic freedom will break open the economic space to new entrants, especially in the form of small and medium-enterprises [SMEs], creating jobs and prosperity,” it added.

Encouraging SMEs to increase manufacturing output could translate into greater mineral demand, including in the foundry and refractories sectors for machine parts.

India also manufactures large volumes of cement as well as ceramics and steel. Growth in these industries is likely to increase demand for minerals such as bauxite, magnesite, kaolin and feldspar, which could be supplied domestically, if production can be increased.

Modi is also expected to encourage overseas miners to invest in India. Already, he is exploring the possible breakup of state-run India Coal Ltd and allowing foreign funds to invest in the coal sector to boost production. Similar measures could be used to encourage industrial minerals development.

Tackling corruption

Another central tenet of the BJP’s manifesto was a promise to tackle corruption in the mining sector.

“In recent years, it has been noticed that country's tangible and intangible resources have been looted with impunity,” the BJP said.

“The adverse result is being felt on two sides: Firstly, the proceeds of the resources have not gone to the public exchequer. Secondly, because of this culture of usurping, the same resources are not available for public purposes. The management of natural resources is marred with either misappropriation or misallocation. This has to be set right.”

Plans to reform dealings in the sector include setting national policies on industrial mineral resources, specifying how much should be utilised, at what time and the rate of production and who should be allotted responsibility.

Investing in agriculture

With the agricultural sector employing around 47% of India’s 1.2bn population, according to data from the World Bank, Modi has also highlighted the need to modernise and expand this industry.

“Agriculture is the engine of India's economic growth and the largest employer, and BJP commits highest priority to agricultural growth, increase in farmer's income and rural development,” the party said.

Policies include increasing public investment in the sector and reforming land acquisition to increase the use of arable land.

Expansion of the agricultural sector will require increased consumption of fertiliser minerals, such as potash, phosphate and sulphur, all of which India imports.

Potash imports hit a five-year of 401,700 tonnes in 2013, compared with 297,000 tonnes in 2012. Over the last five years, phosphate imports have jumped by 44% to 7.18m tonnes in 2013.

If Modi succeeds in growing the agricultural sector, this could have ramifications in the global minerals market, as major nutrient mineral producers such as Russia, North America and Chile increase production to meet demand.

The next China?

Around 10-15 years ago, China and India were seen as drivers of global commodities demand due their rapid economic growth.

However, the paths of the two countries started to diverge at the end of 2000, when Chinese growth started to accelerate and Indian growth started to lag behind – a trend which had a knock-on effect in terms of respective commodities demand.

According to French bank Societe Generale, this difference has become more pronounced in the last five years.

“In 2009 specifically, as the economy began to stagnate, there was a clear shift in [India’s] demand profile relative to the same consumption trends in China,” the bank said.

In 2008, hit by the global financial crisis, India’s GDP growth was 3.9%, down from 9.8% in 2007. After that year, the economy has recovered slightly, but growth has continued to stutter.

Societe Generale forecasts that India’s economy will experience accelerating growth over the next three years, but says it remains uncertain whether the country can become “the next China” in terms of commodities demand.

“We are forecasting Indian GDP to rise to 5.3% in 2014, 6.1% in 2015 and 6.2% in 2017 - only time will tell whether Modi can translate what he has achieved in Gujarat across the rest of India,” the bank said in recent research note.

“From a commodities investment perspective, we will likely need more time to see whether the Indian economy accelerates to become the next China,” it added.

*Conversions made June 2014



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